威斯康辛能源 (WEC) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for waiting, and welcome to Wisconsin Energy's quarterly conference call. This conference is being recorded for rebroadcast and all participants are in a listen-only mode at this time.

Before the conference call begins, I will read the forward-looking language. All statements in this presentation other than historical facts are forward-looking statements that involve risks and uncertainties, which are subject to change at any time. Such statements are made based on Management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in the Company's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.

During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be opened to analysts for questions and answers. In conjunction with this call, Wisconsin Energy has posted on its website a package of detailed financial information at www.WisconsinEnergy.com. A replay of our remarks will be available approximately 2 hours after the conclusion of this call. And now, I would like to introduce Mr. Gale Klappa, Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation.

Thank you. Good afternoon everyone, and thank you for joining us as we review the Company's 2011 second-quarter results. Let me begin as always by introducing the members of the Wisconsin Energy management team who are here with me today. We have Allen Leverett, President and CEO of We Generation, Rick Kuester, our Chief Financial Officer, Jim Fleming, our generous General Counsel, Pat Keyes, our Treasurer, and Steve Dixon, our Controller. Rick will review our financial results in detail in just a moment.

As you saw from our news release this morning, we reported earnings from Continuing Operations of $0.41 a share for the second quarter of 2011. This compares with $0.37 a share for the comparable period last year. Our second-quarter 2011 results were driven by earnings from our $668 million investment in the second expansion unit at Oak Creek, which as you know, came online in January of this year. Overall, we're quite pleased with our second quarter and our year-to-date performance.

Now I'd like to focus for a few minutes on the economy across our service area. After a nearly double-digit rebound in 2010, electric sales to our large commercial and industrial customers rose by a little more than 1% in the first half of 2011. When we take a look a little deeper inside the numbers, we see that the demand destruction from 5 large plant closings during the Great Recession is now being largely offset by modest growth and recovery in other sectors of the region's economy. For example, we're seeing strength in iron ore mining, specialty steel production, and in the paper and printing industries. And from talking with our largest customers, we're cautiously optimistic that the recovery will continue throughout the remainder of the year.

Now, when we look at our residential customers, we see flat sales for the first half of this year, compared to the first 6 months of 2010. As you know, however, the Midwest was in the grip of an old fashioned heat wave last week, and residential and commercial demand was strong. In fact, the peak demand in our system rose to within 2.5% of our all-time record one-hour demand. One other point about the recent heat wave.

I'm pleased to report that our four new Power the Future units, the 2 natural gas fired units at Port Washington and the 2 coal-fired units at Oak Creek performed very well. The 4 units were online throughout the hot spell. They were work horse units, helping to meet customer needs in a very cost-effective manner. As a result there were no brownouts, no blackouts, no threats of curtailment and no calls to interrupt our industrial customers. The experience reaffirms our decision to complete our Power the Future plan, investing in critical energy infrastructure to ensure reliability for Wisconsin and the upper peninsula of Michigan.

Now I'd like to update you on the 3 significant construction projects that we have under way. The 50-megawatt biomass plant in Northern Wisconsin, the Glacier Hills Wind Park, northeast of Madison, and the air quality control upgrade at the original Oak Creek units. As we mentioned on previous calls, a 50-megawatt co-generation plant to be fueled with biomass at a paper mill site in Northern Wisconsin which is owned by Domtar Corporation was proposed by our Company really now, almost 2 years ago. This co-generation plant will help us diversify our renewable energy portfolio. We will have the ability, as you know, to dispatch the unit and the efficient technology will clearly benefit the existing paper mill.

In the second quarter of this year, the Wisconsin Public Service Commission gave its final approval for the project. The project was also approved by our Board and by the Domtar Corporation Board of Directors. In late June we broke ground and began construction. The investment in the biomass plant is expected to total between $245 million and $255 million excluding allowance for funds used during construction. At the early stage of the project, we're on schedule and on budget to meet a completion date by the end of 2013.

The other large renewable project in our pipeline is the Glacier Hills Wind Park, a 162-megawatt energy center located approximately 45 miles northeast of Madison. We're now erecting 90 wind towers across more than 15,000 acres of rolling farmland, and we're scheduled to complete the project on time and on budget by the end of this year. Our current estimate of the capital cost for Glacier Hills is $361 million. This estimate does not include allowance for funds used during construction or reimbursable transmission costs.

The Glacier Hills Wind Park and the biomass project are 2 key components that will allow us to meet Wisconsin's renewable portfolio standard for the year 2015. To refresh your memory, the standard calls for an increase in the amount of electricity we supply with renewable sources from 5% in 2010 to [10%] (corrected by Company after call) in 2015 at a state-wide level. The standard also sets targets for each of the Wisconsin utilities, using an historical baseline. Using that baseline, approximately 8.25% of our retail electricity sales must come from renewable sources in 2015. As I mentioned, when we complete the 2 large renewable projects we now have under construction, we will be well-positioned to meet the 2015 standard. I should point out, however, that we will be depleting our bank of renewable credits after 2015, and as a result, we expect to need additional renewable capacity by the year 2017.

Finally, we're well along on the air quality control upgrade at the original coal-fired units on the Oak Creek site. The older units at Oak Creek are among the most efficient base load units in the Midwest, so the economic solution for our customers was to invest approximately $900 million including allowance for funds used during construction, for the installation of wet flue gas de-sulfurization and selective catalytic reduction facilities. We expect the new controls to be completed in 2012. Construction is progressing very well. The project now is about 83% complete. And once again, we're on time and on budget.

Now, I'd like to briefly mention where we stand on the Wisconsin and Michigan regulatory fronts. On May 26, we filed an application with the Wisconsin Public Service Commission requesting no net increase in base rates for the year 2012. Our proposal includes the following key items. First, authorization to suspend the amortization of $148 million of regulatory assets in 2012. Second, authorization to include $148 million of carrying cost and depreciation for the air quality controls at Oak Creek and for the Glacier Hills wind park. Third, a fuel cost plan for 2012, and finally, a one time credit to customers of $26 million. The credit stems from Wisconsin Electric's settlement about spent nuclear fuel litigation with the US Department of Energy.

We also asked for the authority to reopen the rate proceeding next year for new rates that would be effective in 2013. Now, keep in mind that under a traditional rate case, we would have filed for a base rate increase of approximately 6% for Wisconsin Electric's retail customers in the year 2012. We also said that if the Commission was not comfortable with our creative approach, we would proceed with a traditional rate case. Now, after reviewing our request, the Commission staff issued a memo last week with several alternatives for the Commission to consider. The staff asked for final comments from all the parties in the case by the end of the day tomorrow, July 29.

So as you think about our request, and about the staff memo, there are several things to keep in mind. First, the staff audit of our projected revenue needs points as we expected to a revenue deficiency for 2012. Using the staff numbers, we believe the revenue deficiency would be approximately $100 million in 2012, and that's before any Company rebuttal to the staff's proposed adjustments. Company rebuttal would take place of course in any traditional rate proceeding. This clearly implies that a traditional rate case would result in a rate increase in 2012.

Secondly, we offered what we believe was a unique approach to keeping base rates flat for customers during this fragile economic recovery. And finally, the Company has the ability to file a full rate case at any point in time. So after assessing the staff memo, we believe the only viable alternatives are the 2 paths we originally proposed, a zero base rate increase for 2012 with our recommended approach, or a traditional rate case. We expect the Wisconsin Commission to decide in August.

Turning now to our Michigan operations, earlier this month we filed a $17.5 million rate increase request with the Michigan Public Service Commission. The request is to recover from Michigan customers their pro rata share of renewable generation, environmental controls, and costs associated with Unit 2 at Oak Creek. These costs are already, by the way, being recovered in the Wisconsin jurisdiction. In Michigan, recovery takes place only after an asset is completed and placed into commercial service. Now, as provided for under Michigan law, we plan to self-implement $7.7 million of our rate increase request in January of 2012. We expect the Michigan Commission to rule on the entire request by July of next year.

In summary, at the halfway point of 2011, the Company is performing at a high level. And our Power the Future investments are clearly providing tangible benefits for our customers and our stockholders. While we systematically look for solid utility investments in the future that meet our risk profile, we're pleased that our Board has approved 2 measures that will deliver additional shareholder value. As I mentioned in May, we have approval to repurchase up to $300 million of Wisconsin Energy common stock between now and the end of 2013.

The Board has also approved a dividend policy that will target a 60% payout ratio by the year 2015. This policy of course should support dividend increases of about 8% to 9% a year for the next several years. Now with more details on our second quarter and our outlook for the remainder of 2011, here's our Chief Financial Officer, Rick Kuester. Rick.

Thanks, Gale. As Gale mentioned earlier, our 2011 second-quarter earnings from continuing operations were $0.41 a share. The results were slightly better than our plan because of lower than expected benefits costs and favorable adjustments related to income tax expense. Although I will focus my comments on operating income from continuing operations by segment, and then touch on other income statement items, I did want to mention that we also recorded a gain of $0.05 a share from discontinued operations as a result of the resolution of several state and federal tax issues. I will also discuss year-to-date cash flows and guidance for the third quarter and the full year.

Our consolidated operating income in the second quarter of 2011 was $174 million, as compared to $163 million in last year's second quarter, an increase of $11 million. We clearly benefited from our full quarter's earnings from the second expansion unit at Oak Creek. Operating income in our utility energy segment totaled $88 million, which is down $10 million from the prior year. As we discussed on our last call, we expected our utility earnings to be down this quarter because of warmer than normal second quarter in 2010, and increased operating costs in 2011.

Cooler weather negatively impacted this quarter's results, but our costs came in slightly better than anticipated. We estimate that a cooler April and May helped our gas margins by $11 million as compared with the second quarter of 2010. However, we experienced a mild June this year, and we estimate that weather reduced our electric margins $16 million as compared to the second quarter last year. When we combine the electric and gas margins, we experienced a decline of $5 million on a year-over-year basis due to weather.

The other significant factor impacting utility operating income for the quarter relates to the collection of fuel revenues. On a net basis, we were $9 million worse in the second quarter of 2011, as compared with last year. When you take the weather and fuel recoveries together with all other items, you see the $10 million decline in operating income at the utility. Our operating income in the non-utility energy segment, which includes We Power, came in as expected. We saw higher operating income of $21 million that was driven by the commercial operation of Unit 2 at Oak Creek. We would expect this favorable variance to continue in the third and the fourth quarters. Taking the changes for these 2 segments together, you arrive at the $11 million increase in operating income for the second quarter of 2011.

During the second quarter of 2011, earnings from our investment in the American Transmission Company totaled just over $15 million. Other income increased by $5 million because of higher AFUDC on our utility construction projects, primarily the air quality control system for the older Oak Creek units and the Glacier Hills Wind Park. Net interest expense increased by $4 million, primarily because of interest expense associated with the second unit at Oak Creek. In January, we issued $420 million of long-term debt to replace short-term debt used to finance the construction of Unit 2. In addition, once Unit 2 achieved commercial operation, we no longer capitalized interest on the construction work in progress. While we saw increased interest expense at the We Power level, our holding Company interest expense declined as we retired $450 million of 6.5% long-term debt on April 1 of this year.

Consolidated income tax expense increased by approximately $2 million because of higher pre-tax earnings, offset by slightly lower effective tax rate. During the second quarter, our income tax expense was reduced by $2.2 million because of a favorable resolution of uncertain tax positions in our continuing operations. For the year, we expect our effective tax rate to be between 34% and 35%. Combining all of these items brings you to $98 million of net income from continuing operations for the second quarter of 2011, or earnings of $0.41 per share.

During the first 6 months of 2011, we generated $649 million of cash from operations on a GAAP basis, which is up $225 million from the same period in 2010. Our strong cash flows were driven by higher net income, and higher non-cash charges related to depreciation and deferred income tax benefits. On an adjusted basis, our cash from operation increased by $106 million. The adjustments relate to how GAAP treats changes in restricted cash as an investing activity, while we look at this as an operating item. Our 2011 cash flows were also reduced by $122 million because of contributions to our benefit plans. No such contributions were made in 2010.

Our total capital expenditures were approximately $347 million in the first 6 months of 2011, and we are forecasting annual capital expenditures this year of approximately $950 million. The majority of our capital expenditures are in the utility business and the largest projects are the air quality control system at the Oak Creek site and the Glacier Hills Wind Park. We also paid $122 million in common dividends in the first half of 2011, which was a 30% increase over the same period last year.

On a GAAP basis, our debt to cap ratio was 55.2%, and we were at 52.4% on an adjusted basis. These ratios were an improvement over our December 31st, 2010 levels of 56.9% and 54.1% respectively. The adjusted amount treats half of our hybrid securities as common equity. We may see a slight uptick in these ratios by the end of the year as we fulfill our capital budget commitments and repurchase shares. However, we expect our year-end ratios to be well under the prior year numbers.

Consistent with our past practice, we are using cash to satisfy any shares required for our 401-K plan, options and other programs. Going forward we do not expect to issue any additional shares. Through July 25th, 2011, we have repurchased approximately 650,000 common shares at an average price of approximately $31.40 under the $300 million share repurchase program that Gale mentioned. We will update you each quarter on the progress of our share repurchase program.

As Gale mentioned, we are cautiously optimistic that the investment recovery will continue through the year based on our electric sales volumes for the first half. Anticipated declines due to plant closings in some segments were offset by growth in other segments. To date, our weather normalized retail sales have grown by 0.8%, as compared to 2010. Excluding sales to our largest customer, the iron ore mines, normalized sales were level with 2010 for the first half of the year. These results were in line with our overall forecast.

I will now discuss our earnings guidance for this year. We are raising our annual earnings guidance from a range of $2.05 to $2.10 a share, to a revised range of $2.10 to $2.14 a share from continuing operations. We're comfortable raising this range because of our strong results for the first half of the year, which were driven by cold winter weather, slightly stronger electric sales to our largest customers, and effective cost controls. We will also benefit from the extremely hot weather we have experienced in July, but with that said we still have over 5 months of weather risk. Offsetting these factors will be unfavorable fuel collections as compared to our original plan. For the third quarter of 2011, we are forecasting earnings per share from continuing operations in the $0.47 to $0.50 a share range. Last year, we earned $0.47 a share in the third quarter, restated for the two-for-one stock split earlier this year.

On a quarter-over-quarter basis, we see 4 large items that are expected to cause variances in quarterly earnings. First, last year was very hot and we estimate that weather helped our third quarter earnings by $0.08 a share. Second, with the implementation of the new fuel rules, we expect to see a favorable variance of $0.05 in fuel recoveries this quarter. We expect to under collect fuel cost in the third quarter, but collect more than in 2010. Third, we expect increased O&M expenses associated with storm damage in July, and a major maintenance project at one of our peaking facilities. Finally, the income from Unit 2 at Oak Creek should boost third-quarter earnings by $0.03 a share.

These 4 factors get us to about $0.48 a share from continuing operations for the third quarter of 2011. We increased the range slightly for the hot July weather. With that, I will turn things back over to Gale.

Rick, thank you very much. Overall we're on track and focused on delivering value for our customers and our stockholders.

And now we would like to take your questions. (Operator Instructions). Your first question comes from the line of Paul Ridzon with KeyBanc.

Hi, Paul, good afternoon.

Good afternoon, congratulations.

Thank you. Is there anything particular you're congratulating us about, Paul?

Solid quarter, raising guidance, good Company, good management.

Keep on. I like that. Thank you, Paul. What can we do for you.

Just wondering, with the lower benefits you experienced in the second quarter, was that a timing issue or should that follow through to the rest of the year.

It's a very good question. Let me say this. One of the benefits that we saw in terms of lower costs in the first half was related to employee healthcare, our active medical plans and the costs they incurred. Whether that really transcends through the entire year this year, we don't know yet. But certainly that was one of the major factors that helped us achieve lower O&M costs during the first half of the year. As you know, sometimes these medical claims can tend to be lumpy, but we did have a very good experience on medical claims and medical payments in the first half.

Thank you.

Your next question comes from the line of Brian Russo with Ladenburg Thalmann.

Good afternoon.

Hi, Brian, how you doing today?

Good, thanks. Can you just remind us when the share buyback program went into effect and it looks like you've done $20 million worth of buybacks since it was in effect. Just wondering if that's kind of a run rate we should expect.

Well, obviously we are looking at this as we go. So I wouldn't necessarily project a continuous run rate. But the share buyback program was authorized by our Board at the Board meeting right before our annual meeting on May 5. And I believe we actually began repurchasing some shares in July.

Okay. And then on the tax rate, I think you said 34% to 35% in 2011. Will it revert back to the 36% tax rate post 2011 or is that kind of the new tax basis?

We'll ask our controller, Steve Dickson, to answer that question for you.

I think next year it will tick up a little bit slightly. This year we're getting the benefit from equity AFUDC as Rick had mentioned on the air quality project and the windmill, Glacier Hill. So once those go into service, we'll stop having AFUDC equity, which as you know, is a permanent item. That's giving us a little benefit this year and we'll lose a little bit of that next year.

Great. Thank you.

Thank you, Brian. Appreciate your questions.

Your next question comes from the line of Michael Lapides with Goldman Sachs.

There's going to be football, Michael.

There is going to be football, although I'm more of a college guy, so NFL plays, NFL doesn't. As long as the SEC, meaning the Southeastern Conference, is busy, I'm okay.

Roll Tide.

You got it. Question for you. When you think about procedurally how -- kind of what happens from here at the PSCW around your request, kind of the accounting order versus having a full-blown GRC, and if you wind up having a full-blown GRC, what would the time line and implementation of rates look like. You're kind of already several months behind in the process if you're about to start up a typical nine or 10 month process.

Good question, Michael. First of all, we do expect that the Commission will vote on our proposal in August. So I don't think we're going to see a significant delay from here in getting a decision from the commission on door A or door B, door A being our creative approach to holding base rates flat or us filing a full rate case and moving through that proceeding.

One bit of insight into if we had to go through door B, which obviously we believe the Company would be just fine going through door B, we have already filed -- when we filed on May 26, we already filed all the backup data related to our projected revenue requirements for 2012. And when the staff did its memo relating to various options or various ideas that they had, what they actually published in that memo was a preliminary audit of our 2012 -- what a 2012 rate case might look like.

So we are not as far behind procedurally if we had to go through door B as one might expect because all the data's been on file. We would refresh that data and if the Commission wants us to proceed with a full general rate case, my guess is we could file the remaining refreshed data within a couple of weeks after that decision.

Got it. Okay. So we wouldn't be starting from August into a nine or ten month process, we would be in kind of the midpoint of it, and you would start getting briefs and final briefs and have hearings and go from there in the back end of the year.

That would certainly be our thinking. We would not be in any way shape or form into a nine or ten month process from there. I just do not see that, and that is to say, we're really ahead of the curve from the standpoint of really on May 26 we filed all the necessary data to allow the staff to audit the revenue projections and the costs for 2012.

Got it. Okay. Thank you, guys, much appreciate it.

Rick is making a point, Michael, we did that for base rates and then under the new fuel rules all the utilities have to file their separate fuel plan really within a matter of the next few weeks.

Got it. Okay. I will follow up offline on the fuel plan stuff.

Okay. Terrific. Thank you, Michael.

Thank you.

Your next question comes from the line of Paul Patterson with Glenrock Associates.

Hello, Paul, how are you today?

All right. Good afternoon. I want to follow up on Michael's question on the rate case.

Do you have Michael's number?

No, I don't, actually. But I wanted to ask you about, I mean, it sounded like they were presenting options, and maybe I got it wrong, but I was under the impression this is sort of a take or leave it option that you were providing in terms of this alternative, that in other words, you basically go to a full-blown rate case as opposed to some of the alternatives that they were proposing. Could you elaborate a little on that or where that stands now?

Sure, I'll be happy to. The staff did seem to, as we went through the staff memo, the staff certainly did seem to provide some potential alternatives, adjustments. I'm not sure as I read through it that they actually recommended anything, except that they put on the table several other options. One I think compelling point, as we read through that staff memo, is that if the answer is zero, then getting to zero with staff adjustments versus getting to zero with our proposal leaves the customer in exactly the same spot in 2012. The customer's no better off, but if the staff makes adjustments then the Company would be weaker.

So our view as I mentioned in the script is there really are only two viable workable options here. One is the creative approach with the order that we described, or we will certainly proceed with a full case and that's because the real issue here is how to make room for and how to begin recovering almost $1.3 billion of new investment in projects the Commission has already approved and projects that are on time and on budget.

So the issue we're trying to deal with here is we clearly have under Wisconsin regulation, we clearly have $1.3 billion that has to begin being recovered in rates next year, and we thought we could find a way through the accounting order and the ceasing of the amortization of some of the commission IOUs they've given us, we thought we could manage the Company and stay flat with base rates next year. But if that's not the case, in other words, if they feel like that's just not the way to go, then you are correct, the only viable alternative is to proceed with a full case.

Okay. And then switching to the MISO market and the capacity proposal that they came up with, now, I know that you're mostly regulated and I would think there probably wouldn't be that much opportunity from a profit and loss perspective perhaps, doing capacity sales or what have you into another market, but I was just wondering if there was any impact on rates or any comment that you have with respect to the MISO capacity market filing that they made at FERC.

We'll certainly let Allen give you his view. Just to frame it, again, all of the new capacity we've built, you're absolutely right, is dedicated to retail customers. I wouldn't see from the MISO capacity proposal really any significant impact on any of the Power the Future units. We do make opportunity sales but I don't see any major impact. Allen, do you?

I think from a practical standpoint, Paul, given the capacity situation and the MISO footprint as a whole, meaning the reserve margin as a whole in MISO, I don't see any impact really of any significant degree on us for quite a long time.

Okay.

And we say impact, any sort of additional credits coming back to retail customers.

Okay. Great. I appreciate it.

You're more than welcome. Thanks for your questions.

Your next question comes from the line of Vedula Murti with CDP Capital.

Vedula, how are you doing today?

I'm doing well. Good afternoon.

I've got to ask now, are you being paid in Canadian dollars or in US dollars? I'm worried about the exchange rate.

US, unfortunately, so we'll see.

Well, try to renegotiate that.

I'm domestic so I don't have a currency translation issue.

Okay. How you doing?

I'm doing well. My question is as I recall vaguely and you can remind me what I'm thinking of, I thought that there was like I think the University of Wisconsin or a municipal entity had sold like a power plant or something like that within the state of Wisconsin, and I'm wondering as you have opportunities to deploy capital, aside from renewables and maybe additional ATC opportunities, et cetera, do you foresee the opportunity for assets within the state of Wisconsin that are currently owned by cooperatives or municipals that may be going through financial duress right now, given the economy, and everything like that, or simply priorities that may become available to you that we ought to be -- that could be possible?

Very good question, Vedula and you have seen some things I'm sure referred to in some of the news stories about the state budget issues. The state does own -- the State of Wisconsin itself does own 29 different steam or power generation facilities, many of them co-gen facilities, scattered throughout the State of Wisconsin. These facilities have traditionally been owned by the state, operated by state employees, and generally provide energy services or steam services to state buildings, ranging from the University of Wisconsin campus in Madison to the state penitentiary, actually.

The Walker administration has taken a position that they believe, given the major amounts of capital that will probably have to be spent to upgrade a number of these plants with modern environmental controls, that they might consider a sale of those state-owned power plants. That would take a piece of legislation. We believe the legislation might be introduced this fall to enable the Department of Administration to basically conduct a sale of some or all of those plants. So that is probably what you're hearing. We would have some interest in some of those facilities and it certainly could be, if the legislation passed, a potential investment opportunity for us right here inside the State of Wisconsin.

And does it appear that's probable?

Again, I think the Walker administration is going to assess whether or not they will introduce the legislation this fall. We have some recall elections that are under way in the state right now and I don't think anything will be decided in terms of a particular piece of legislation on this or any or any other subject now until after the recall elections. Recall elections should be completed by mid-August and then I would think we would have a much clearer view of the landscape.

Okay. That was it. Thank you very much.

Thank you.

Your next question comes from the line of Andy Levi with Caris & Company.

Hi, guys.

How are you?

Good. I'm doing okay. The reason you took up guidance was why?

The reason -- I don't know why that made me laugh. Andy, because we wanted to make your day. How's that?

That's fine. I didn't hear it. I apologize.

No problem. We had a solid first half, much of it driven by a colder winter. We've had effective cost controls and as we look at where we stand, Rick, we decided it was the right thing to do to raise the guidance.

Maybe a little bit improvement in electric sales in the second quarter too, Andy, so --

Okay. And then just to understand, so there's door A, there's door B on this proposal but there's no door C, that's basically what you're saying.

That is correct. And we're not trying to be difficult about it. It's just we have a real situation with $1.3 billion of capital coming into service on projects the Commission has approved and that has to be dealt with. So that's why there's only a door A or a door B.

And when we get comments tomorrow, I guess then the next open meeting or open -- is what, August 3rd or something like that and then August 10th after that, is that where we think there should be some type of vote by the commissioners.

I believe, although I don't think they're set in concrete, I believe it's August 3 and August 11.

Thank you. And just to understand, the $100 million that was the revenue deficiency, that was based on what, a 10.5 ROE.

No that was based on our current allowed ROE.

What was that.

10.4, and Andy, you will see tomorrow, all of the parties in our proceeding here are supposed to have their comments in tomorrow. You'll actually see in our comments a chart that lays out how -- that lays out how we get to that roughly $100 million based on staff adjustments revenue deficiency for 2012.

Okay.

That will be very clear for you tomorrow and for everyone to see.

Okay. So you guys will be filing something tomorrow as well.

Absolutely.

Great. Thank you very much, guys, and doing a good job as Mr. Ridzon said.

(Operator Instructions). Your next question comes from the line of Dan Jenkins with State of Wisconsin.

Dan.

Hi.

I hate to ask this, but how was that naked bike ride?

Unfortunately, I did see it. I wasn't a participant, but I did see it, unfortunately.

Let me get this straight about Madison law. Someone said it's only illegal to do that if you get complained about?

I think that's subject to interpretation.

Well, I'm glad you and your relatives showed up for it, I think, Dan. What can we do for you, Dan?

Just first a little bit on the Wisconsin rate filing. Are there any interveners involved in that case beyond the staff and the Company that have taken positions yet or are expected to take positions?

Yes, Dan, there are two traditional participants in the case other than the staff and the Company and that's CUB, the Citizens Utility Board and WIEG, the Wisconsin Industrial Energy Group. Their initial comments were, we don't have a philosophical opposition to door A or door B, but they would like to see some numbers from the staff. So now that the staff has done its memo, we would expect that CUB and WIEG will make some comments. They certainly have been invited to by the deadline, by the end of the day tomorrow.

That will pretty much all clarify by tomorrow.

That would be our thought.

Okay. And then related to the Michigan rate request, I missed the amount. What was the amount of that again?

The request of $17.5 million of which under Michigan law we would plan to self-implement a portion of that, about $7.7 million in January, and then we would expect under Michigan procedures and law, we would expect a decision from the Michigan Commission on the full case by sometime July of next year.

Okay. And what was the ROE that you requested in that case?

I believe it's the exact same ROE, 10.4.

Okay. And then I was curious, on your electric forecast, the fact that you did raise guidance a little bit, I was wondering what your second-half assumptions are related to retail sales growth, in terms of megawatt hours, both top-line and for the large C&I group.

Dan, essentially we are leaving our forecast unchanged. We make an annual forecast. Really, when you weather normalize our first half, we are dead on the forecast. Some segments are better, some segments are worse, but when you net it all through and weather normalize, our first-half 2011 sales actually had been literally dead on the forecast. So we didn't see a need to actually change the forecast because that forecast as you know is done on a weather normalized basis but obviously we have seen very strong demand in July, and that coupled with a cold winter and solid earnings for the first half really led us to a decision to raise the guidance.

Do you anticipate the 1.8% increase that you saw from the large C&I in the second quarter being kind of a run rate going forward, or do you have an opinion on what to expect?

We would hope so, but again, at this stage of the game we don't think there's a lot of merit in doing minor adjustments to the annual sales forecast. But again, there would be upside if we saw a bit stronger economic recovery in the industrial sectors in the second half.

Okay. And then the last things I was wondering about relate to cash from operations, it was quite a bit stronger in the first half versus last year, and I know you had the tax settlement and so forth and one of the big gains was in the deferred income tax and investment tax credits and then also in working capital. I was wondering how we should think about those categories in the cash flow in the second half.

Rick or Steve, you want to try to answer Dan's question, particularly about working capital.

I think the question was cash from operations and it was strong and I would see it continuing strong. Net income, we project to be up over the prior year. Depreciation, non-cash charges, those should increase over prior years so those are good uses of cash. Our deferred income taxes as we talked about earlier, that's helped by bonus depreciation, that should carry through the end of the year. And our working capital, one of the big items in there was we were able to reduce some of our inventory and so that was strong for the first six months. The thing about working capital, one of the big drivers there is our gas in storage and so if you tell us what's the gas price will be at the end of the year, we'll have a better idea. But we feel good about the first six months and we see it continuing through the year.

Just to refresh your memory, Dan, we said we had about $100 million of impact from bonus depreciation this year and $200 million next year. From a cash standpoint.

Okay. I guess then how does that translate given that you have about $600 million of CapEx in the second half into financing needs then in the second half?

Well, you have to look also at maturities, when you look at our financing needs. And I would expect, because it's in our financial plan, that we would have a bond offering at the Wisconsin Electric level sometime in the second half of this year.

Okay. Thank you.

You're more than welcome. Careful on the bike.

Okay.

Bye, Dan.

Bye.

Your next question comes from the line of Tim Winter with Gabelli & Company.

Hi, Tim, how are you?

Good, Gale, how are you? I've got a couple questions. One is if you go down door B and have fully -- full rate case, is it like -- and it extends into next year, would it be likely that the rate increase would be retroactive to January 1st?

Under Wisconsin law, there really is no retroactive rate making, if you will. So -- but there will be two pieces, obviously. There would be the separate fuel plan, fuel cost plan, and under the new fuel rules that went into effect, the Commission would -- we would file -- we were not due, nor was any other utility in Wisconsin due to file a fuel cost plan until next month. So we would be on time in terms of the normal schedule for a fuel adjustment at the end of December, starting in January. So that piece would not be affected by a schedule for a general rate case.

So the only piece that would be would be base rates. And there, we would certainly try to work with the Commission and the staff to try to get a timely decision. As you may have heard me answer one of the other callers, we're really not all that far behind the curve, because of all the data that was filed on May 26, that has already allowed the commission staff to do a preliminary audit of 2012 adjustments and expenses and revenue needs.

Okay. Great. Then second question. Can you update us on the 2012 and 2013 CapEx budget and then maybe give some idea what types of rate base growth you may have post 2013.

Absolutely. We'll be happy to. Rick and I will do that together and we're turning to a page right now where we have our 2012 and 2013 broken down.

This is on our website too.

We have about, just to start off, we have about a run rate on depreciation of about $250 million a year, $250 million to $260 million -- actually, it would be going up. 2012 would be $310 million and 2013 would be $320 million. That's our estimate of depreciation in each of those two years. And then as you know, we have a significant amount of capital spend that we need to do on what I call network renewal. And a lot of that is simply replacement of aging power poles, transformers, substations, conductors, et cetera. So we have a run rate of about $400 million a year in 2012 and 2013 for network renewal. And then we also have additional spending on environmental and renewable. Rick?

Yes. And then if you look at our rate base we are showing our rate base as $6.7 billion in 2012, and essentially flat to 2013 because of the effects of bonus depreciation. So basically a flat rate base for 2012 to 2013.

And Rick's exactly right, if you had looked at this slide that's on our website six months ago or seven months ago, we would have been projecting about a $7 billion rate base in 2013. But the bonus depreciation, which gives us cash now, basically took the rate base growth down back -- took the rate base growth down and that's why we're showing the $6.7 billion and $6.7 billion in terms of projected rate base for 2012 and 2013. Does that respond to your question?

Yes. I was just wondering what sorts of longer-term projects post 2013 that you're considering.

We have a very significant list of projects that we are systematically working our way through. We talked about a couple of them earlier, one is the possibility that the State may divest some of its energy assets. And that would certainly give us an investment opportunity. We know, as I mentioned in the script, that we are going to, under the current law, need additional renewables beyond 2016. We still have to deal with aging gas and electric distribution infrastructure, and I am very confident that we are going to be seeing additional capital spending, probably in that 2013 and 2014 time frame, and we have budgeted related to additional regulations related to gas distribution and pipeline safety. Those regulations and those proposals are being debated right now by FERC and the Congress.

But remember, we have a pretty sizable natural gas distribution business, and I'm quite confident we're going to see to meet additional requirements on the gas network in particular, additional capital spend, and then as you know, EPA is continuing to formulate additional air quality control rules. It's not just air quality control. It's the water intake rules, as well in many of the power plants. At plants that don't have cooling towers today. So there's a whole range of potential investment opportunities and we are systematically working our way through those to see what our 2014, 2013, 2015 capital spend looks like. Rick, anything you would like to add?

I think you pretty much did it, Gale.

Thank you, guys.

You're welcome.

Your next question comes from the line of Andy Levi with Caris & Company.

Hey, Andy, you're back.

Quick follow-up. The $2.10 to $2.14, can we carry that through to 2012?

Andy, right now because of where we stand in terms of trying to work through the 2012 revenues with the Commission, I think we really can't give you 2012 guidance right now. But we certainly wanted to give you our best look at the remainder of 2011.

I understand the guidance. But in a sense, the things that get you to the $2.10, $2.14 are sustainable in 2012?

Part of what gets us to the $2.10 to $2.14 is a cold winter and a hot July.

Right.

So I would leave that to your discretion but I would say at the present time we need to keep our powder cool here for 2012 dry, yes, dry, exactly. Cool and dry.

But the other thing, Andy, while we do have some AFUDC in there for the Glacier Hills Wind Park and the air quality controls at South Oak Creek, that is kind of the centerpiece of next year's rate case, whether it be door A or door B, in that we would expect to recover on those projects since they're going into service.

Okay. Thank you.

You're welcome, Andy. All right. Well that, ladies and gentlemen, I believe concludes our conference call for today. Thank you so much for participating. If you have any other questions, our favorite Colleen Henderson will be available in the Investor Relations office and her direct line is 414-221-2592.s Thanks, everyone. Have a good day.